A pretty good jobs report came out yesterday, along with some expected upward revisions in the last two month's numbers. Normally I would say this doesn't look good for the Doves on the Fed, but real-wage growth has been flat. The pent-up-wage-deflation narrative only goes so far, especially after a paper from Goldman's Jan Hatzius.

I'm personally split: I'm inclined to think that a dovish stance is the best policy move going forward, if only because NGDP, which I view as the single best indicator, still lags pre-recession levels, which should be reflective of slack in the economy barring the fulfillment of Larry Summer's secular-stagnation narrative. But, with U3 down to 5.9 percent the LFPR still far below pre-recession levels, I'm at a stage where I'm ready to throw in the towel and accept that those people will not re-enter the labor force. If they do, God help us.

The job of monteray policy is to ensure low levels of unemployment which are the result of sticky wages. If wages are falling and unemployment is decreasing, this is actually a good thing since it means the market is clearing.

The Feds isn't a main contributing factor to long-term economic growth. Efficient business practices, a strong labor forces, technology, and capital accumulation are the drivers of economic growth.

At 10/6/2014 11:43:27 PM, darkkermit wrote:The job of monteray policy is to ensure low levels of unemployment which are the result of sticky wages.

Unemployment is not the result of sticky wages. It's the result of an exogenous aggregate-demand shortfall. Rigidities build during a recession, meaning that necessarily people will be laid off in lieu of having their money wages slashed, but the long-run condition in which wages fall to their equilibrium as a hallmark of "markets clearing" is simply false: markets may clear in a theoretical long-run position, but that position is far too elusive to adequately quantify. Moreover, rising, not falling, wages are consistent with declining cyclical unemployment. You're only considering a classical model where unwillingness to work at a prevailing wage unto itself is the chief cause of unemployment, but surely that's far from the truth. Consider diminishing marginal returns to labor, for instance, which leads to over-utilization of capacity.

If wages are falling and unemployment is decreasing, this is actually a good thing since it means the market is clearing. :

I've already explain why your market-clearing notion is overly simplistic and not reflective of the real world. Let me know address your misunderstanding of the data I pointed out. Money wages have not declined; they were flat last month, but have increased year-over-year at about 2 percent, whilst real wages have flat-lined. Even under your fictitious scenario, this is far from the case.

Moreover, if wages were actually falling, we'd already be in the long run, meaning we surpassed the NAIRU. Real wages have been flat for the entirety of the recovery. Had we surpassed the NAIRU then, not only would U3 stop declining -- it's declined FASTER than projections said it would -- but inflation would accelerate. But latest core PCE numbers as of July 2014 showed only a 10-basis point hike in core inflation to 1.6 percent. Under your thesis, inflation should be accelerating. In the long run wage rigidities dissipate, so increasing employment beyond its "efficient" level should have no effect on output because monetary policy has no long-run effects, but should dangerously drive up wages and prices as inflationary expectations rise ad infinitum.

The Feds isn't a main contributing factor to long-term economic growth. Efficient business practices, a strong labor forces, technology, and capital accumulation are the drivers of economic growth.

Yes, they are, but we're not in the "long run" yet. We're still stuck in the short run, and flat, "sticky" wages is the greatest indication of that.

At 10/4/2014 3:54:54 PM, MonetaryOffset wrote:A pretty good jobs report came out yesterday, along with some expected upward revisions in the last two month's numbers. Normally I would say this doesn't look good for the Doves on the Fed, but real-wage growth has been flat. The pent-up-wage-deflation narrative only goes so far, especially after a paper from Goldman's Jan Hatzius.

I'm personally split: I'm inclined to think that a dovish stance is the best policy move going forward, if only because NGDP, which I view as the single best indicator, still lags pre-recession levels, which should be reflective of slack in the economy barring the fulfillment of Larry Summer's secular-stagnation narrative. But, with U3 down to 5.9 percent the LFPR still far below pre-recession levels, I'm at a stage where I'm ready to throw in the towel and accept that those people will not re-enter the labor force. If they do, God help us.

At 10/6/2014 11:43:27 PM, darkkermit wrote:The job of monteray policy is to ensure low levels of unemployment which are the result of sticky wages.

Unemployment is not the result of sticky wages. It's the result of an exogenous aggregate-demand shortfall.

And exogenous aggregate demand shortfalls can be solved through market clearing. However, if markets don't clear then you get a surplus of goods and labor. Labor surplus is the most rigid.

Rigidities build during a recession, meaning that necessarily people will be laid off in lieu of having their money wages slashed,

Which is what I just stated, wage stickiness.

but the long-run condition in which wages fall to their equilibrium as a hallmark of "markets clearing" is simply false: markets may clear in a theoretical long-run position, but that position is far too elusive to adequately quantify.

Agreed, that's what I mean through sticky wages, in which markets aren't clearing.

If your argument is because an increased in aggregate demand causes greater GDP and thus higher wages, this is not necessarily the case. Lower levels of unemployment will increase GDP since more people working = higher GDP. If markets are clearing at lower wages then previously, this is only an indication that aggregate demand was too high previously not that you need to increase aggregate demand.

Once unemployment reaches the natural rate of unemployment, the job of targeting aggregate demand is complete.

You're only considering a classical model where unwillingness to work at a prevailing wage unto itself is the chief cause of unemployment, but surely that's far from the truth. Consider diminishing marginal returns to labor, for instance, which leads to over-utilization of capacity.

Not really. Significant levels of layoffs would not be robust enough to instantly create unemployment. And a lot of the reasons employers prefer to layoff workers rather than cut pay are based on psychological reasons and business inefficiencies.

But I'd also say that even when employees are laid-off, they don't have an understanding of what their real value is worth or be unwilling to accept a job for lower pay under these new economic conditions. I'lll see if I can find the source for this though.

If wages are falling and unemployment is decreasing, this is actually a good thing since it means the market is clearing. :

I've already explain why your market-clearing notion is overly simplistic and not reflective of the real world. Let me know address your misunderstanding of the data I pointed out. Money wages have not declined; they were flat last month, but have increased year-over-year at about 2 percent, whilst real wages have flat-lined. Even under your fictitious scenario, this is far from the case.

Okay, so what? This means aggregate demand was high prerecession, but now long-term aggregate supply now reflects reflects precession aggregate demand.

Moreover, if wages were actually falling, we'd already be in the long run, meaning we surpassed the NAIRU. Real wages have been flat for the entirety of the recovery. Had we surpassed the NAIRU then, not only would U3 stop declining -- it's declined FASTER than projections said it would -- but inflation would accelerate. But latest core PCE numbers as of July 2014 showed only a 10-basis point hike in core inflation to 1.6 percent. Under your thesis, inflation should be accelerating. In the long run wage rigidities dissipate, so increasing employment beyond its "efficient" level should have no effect on output because monetary policy has no long-run effects, but should dangerously drive up wages and prices as inflationary expectations rise ad infinitum.

Okay so we've established that wages aren't falling. But aggregate supply has been increasing

The Feds isn't a main contributing factor to long-term economic growth. Efficient business practices, a strong labor forces, technology, and capital accumulation are the drivers of economic growth.

Yes, they are, but we're not in the "long run" yet. We're still stuck in the short run, and flat, "sticky" wages is the greatest indication of that.

The short run is when prices don't change at all. If we were stuck in the short run, then prices wouldn't be changing at all which clearly isn't the case. "Stickiness" is a gradient, and so is the "short-run" vs. "the long run". The short run and the long run are both interacting with one another at the same time.

At 10/7/2014 6:54:17 PM, darkkermit wrote:And exogenous aggregate demand shortfalls can be solved through market clearing. However, if markets don't clear then you get a surplus of goods and labor. Labor surplus is the most rigid.

That's impossible at the zero lower bound. The self-correcting mechanism whereby prices and wages fall is destabilizing; nominal rates are pinned at zero, so any fall in the price level translates into a rise in real interest rates, which depresses output and inflation further, increases real rates again, etc. It's never-ending. Your neoclassical, "let markets clear" nonsense is USUALLY crap because it presupposes the autonomy of the market mechanism -- and this fictitious long run, truly, tells us just to do nothing and wait for market to clear, while eating all the pain in the short run, which we're perpetually stuck in any way -- but it doesn't even work right now by the textbook model.

Rigidities build during a recession, meaning that necessarily people will be laid off in lieu of having their money wages slashed,

Which is what I just stated, wage stickiness.

But you don't understand it, at all. You suggested we're moving toward a long-run equilibrium. I said, one, no we're not because wages would be FALLING, not flat, and two, that's impossible at the ZLB, anyway, because output and inflation would be rapidly falling. But they're not.

Agreed, that's what I mean through sticky wages, in which markets aren't clearing.

You completely misunderstood my point. I'm saying markets "clearing" is a theoretical fantasy that never takes place in the real world, and right now cannot happen at all.

If your argument is because an increased in aggregate demand causes greater GDP and thus higher wages, this is not necessarily the case. Lower levels of unemployment will increase GDP since more people working = higher GDP. If markets are clearing at lower wages then previously, this is only an indication that aggregate demand was too high previously not that you need to increase aggregate demand.

......so much to unpack here. You really don't understand economics.

Aggregate demand IS GDP. The terms are interchangeable. Granted, when we say AD we usually mean nominal GDP, and because real variables are hard to quantify, we often associate falling U3 with rising nominal growth because inflation generally moves upward in tandem with real growth.

No, that isn't my argument, but good job strawmanning it and demonstrating your lack of understanding. My argument is the basic Philips Curve: the economy improves, necessarily assymetries of bargaining leverage decline as demand for workers rises, there's necessarily more competition for labor amongst firms, wages rise. It's a dubious model at best in light of flat real wages from the 1980s on, but it's generally the textbook case following a deep recession. Pent-up wage deflation is a whole other issue, and I doubt you understand it enough to even make the case for it, but I assure you that it isn't happening; the best explanation is a flattening of the Philip's Curve.

Your argument is straight Hayekian, and it's utter bullcrap. First of all, get off your fixation on market perfection. It's a fantasy. You're suggesting that HIGHER AD pre-crisis leads to lower AD post-crisis. That's just a complete fantasy that only works in the Hayekian world where government "distortions" >>> malinvestment >> business cycle. Assymetries of bargaining leverage and lack of labor flows is what you really should be looking at.

Not really. Significant levels of layoffs would not be robust enough to instantly create unemployment.

Significant levels of layoffs IS unemployment. Unemployment only rose 20 basis points in 2007 immediately after the housing bubble burst because there wasn't a SIGNIFICANT amount of layoffs.

And a lot of the reasons employers prefer to layoff workers rather than cut pay are based on psychological reasons and business inefficiencies.

Which confirms what I said about downward nominal wage rigidity, though many of the reasons are structural: fixed contracts, union influence, etc.

But I'd also say that even when employees are laid-off, they don't have an understanding of what their real value is worth or be unwilling to accept a job for lower pay under these new economic conditions. I'lll see if I can find the source for this though.

Of course not, because people aren't rational actors and "real value" -- or MP of labor -- is a theoretical, neoclassical fantasy that doesn't exist in the real world.

Okay, so what? This means aggregate demand was high prerecession, but now long-term aggregate supply now reflects reflects precession aggregate demand.

Thank you for showing you COMPLETELY misunderstood everything I said. Are you actually conceding that LRAS would shift to the left to compensate for an AD shortfall? That the short run can undermine the long run? The second you do that, you concede to Keynes, and this debate is over.

Okay so we've established that wages aren't falling. But aggregate supply has been increasing

You just avoided responding to everything I just said, showing you that we're clearly NOWHERE near the NAIRU and therefore nowhere near markets "clearing."

I don't know how AS increasing means anything when you just conceded that LRAS shifted to the left as a result of a short-run AD shortfall. Yes, an AD shortfall leads to an excess in supply -- thank you for conceding that -- and naturally supply will adjust down under a perfect market mechanism. Increasing? That's impossible, unlikely, and untrue. It's also a completely irrelevant point. Are you at the point where you're just throwing crap at the wall and hoping it will stick?

The short run is when prices don't change at all. If we were stuck in the short run, then prices wouldn't be changing at all which clearly isn't the case. "Stickiness" is a gradient, and so is the "short-run" vs. "the long run". The short run and the long run are both interacting with one another at the same time.

The point I was responding to her regarded monetary policy and the long run, and the point I made was that the Fed cannot impact "long-run" growth because beyond the NAIRU rising AD just leads to higher inflation, but doesn't increase output.

The short run is when prices and wages are sticky. The long run is when prices and wages are perfectly flexible. The reason you can cite some sort of gradient -- which I buy, and which also undermines your dumb, neoclassical textbook argument -- is because the concepts are merely theoretical nonsense. Prices and wages are not flexible, and therefore we aren't in the long run. Your insinuation that prices don't change in the short run is patently absurd, as that suggests a constant level of inflation in the short run. Prices and wages do not adjust DOWNWARD -- which is the case right now.

At 10/7/2014 6:54:17 PM, darkkermit wrote:And exogenous aggregate demand shortfalls can be solved through market clearing. However, if markets don't clear then you get a surplus of goods and labor. Labor surplus is the most rigid.

That's impossible at the zero lower bound. The self-correcting mechanism whereby prices and wages fall is destabilizing; nominal rates are pinned at zero, so any fall in the price level translates into a rise in real interest rates, which depresses output and inflation further, increases real rates again, etc. It's never-ending. Your neoclassical, "let markets clear" nonsense is USUALLY crap because it presupposes the autonomy of the market mechanism -- and this fictitious long run, truly, tells us just to do nothing and wait for market to clear, while eating all the pain in the short run, which we're perpetually stuck in any way -- but it doesn't even work right now by the textbook model.

Rigidities build during a recession, meaning that necessarily people will be laid off in lieu of having their money wages slashed,

Which is what I just stated, wage stickiness.

But you don't understand it, at all. You suggested we're moving toward a long-run equilibrium. I said, one, no we're not because wages would be FALLING, not flat, and two, that's impossible at the ZLB, anyway, because output and inflation would be rapidly falling. But they're not.

Agreed, that's what I mean through sticky wages, in which markets aren't clearing.

You completely misunderstood my point. I'm saying markets "clearing" is a theoretical fantasy that never takes place in the real world, and right now cannot happen at all.

If your argument is because an increased in aggregate demand causes greater GDP and thus higher wages, this is not necessarily the case. Lower levels of unemployment will increase GDP since more people working = higher GDP. If markets are clearing at lower wages then previously, this is only an indication that aggregate demand was too high previously not that you need to increase aggregate demand.

......so much to unpack here. You really don't understand economics.

Aggregate demand IS GDP. The terms are interchangeable. Granted, when we say AD we usually mean nominal GDP, and because real variables are hard to quantify, we often associate falling U3 with rising nominal growth because inflation generally moves upward in tandem with real growth.

No, that isn't my argument, but good job strawmanning it and demonstrating your lack of understanding. My argument is the basic Philips Curve: the economy improves, necessarily assymetries of bargaining leverage decline as demand for workers rises, there's necessarily more competition for labor amongst firms, wages rise. It's a dubious model at best in light of flat real wages from the 1980s on, but it's generally the textbook case following a deep recession. Pent-up wage deflation is a whole other issue, and I doubt you understand it enough to even make the case for it, but I assure you that it isn't happening; the best explanation is a flattening of the Philip's Curve.

Your argument is straight Hayekian, and it's utter bullcrap. First of all, get off your fixation on market perfection. It's a fantasy. You're suggesting that HIGHER AD pre-crisis leads to lower AD post-crisis. That's just a complete fantasy that only works in the Hayekian world where government "distortions" >>> malinvestment >> business cycle. Assymetries of bargaining leverage and lack of labor flows is what you really should be looking at.

Not really. Significant levels of layoffs would not be robust enough to instantly create unemployment.

Significant levels of layoffs IS unemployment. Unemployment only rose 20 basis points in 2007 immediately after the housing bubble burst because there wasn't a SIGNIFICANT amount of layoffs.

And a lot of the reasons employers prefer to layoff workers rather than cut pay are based on psychological reasons and business inefficiencies.

Which confirms what I said about downward nominal wage rigidity, though many of the reasons are structural: fixed contracts, union influence, etc.

But I'd also say that even when employees are laid-off, they don't have an understanding of what their real value is worth or be unwilling to accept a job for lower pay under these new economic conditions. I'lll see if I can find the source for this though.

Of course not, because people aren't rational actors and "real value" -- or MP of labor -- is a theoretical, neoclassical fantasy that doesn't exist in the real world.

Okay, so what? This means aggregate demand was high prerecession, but now long-term aggregate supply now reflects reflects precession aggregate demand.

Thank you for showing you COMPLETELY misunderstood everything I said. Are you actually conceding that LRAS would shift to the left to compensate for an AD shortfall? That the short run can undermine the long run? The second you do that, you concede to Keynes, and this debate is over.

Okay so we've established that wages aren't falling. But aggregate supply has been increasing

You just avoided responding to everything I just said, showing you that we're clearly NOWHERE near the NAIRU and therefore nowhere near markets "clearing."

I don't know how AS increasing means anything when you just conceded that LRAS shifted to the left as a result of a short-run AD shortfall. Yes, an AD shortfall leads to an excess in supply -- thank you for conceding that -- and naturally supply will adjust down under a perfect market mechanism. Increasing? That's impossible, unlikely, and untrue. It's also a completely irrelevant point. Are you at the point where you're just throwing crap at the wall and hoping it will stick?

The short run is when prices don't change at all. If we were stuck in the short run, then prices wouldn't be changing at all which clearly isn't the case. "Stickiness" is a gradient, and so is the "short-run" vs. "the long run". The short run and the long run are both interacting with one another at the same time.

The point I was responding to her regarded monetary policy and the long run, and the point I made was that the Fed cannot impact "long-run" growth because beyond the NAIRU rising AD just leads to higher inflation, but doesn't increase output.

The short run is when prices and wages are sticky. The long run is when prices and wages are perfectly flexible. The reason you can cite some sort of gradient -- which I buy, and which also undermines your dumb, neoclassical textbook argument -- is because the concepts are merely theoretical nonsense. Prices and wages are not flexible, and therefore we aren't in the long run. Your insinuation that prices don't change in the short run is patently absurd, as that suggests a constant level of inflation in the short run. Prices and wages do not adjust DOWNWARD -- which is the case right now.

God, read a textbook, man.

Wow...you're really full of yourself. Mental masturbation at its finest.

At 10/4/2014 3:54:54 PM, MonetaryOffset wrote:A pretty good jobs report came out yesterday, along with some expected upward revisions in the last two month's numbers. Normally I would say this doesn't look good for the Doves on the Fed, but real-wage growth has been flat. The pent-up-wage-deflation narrative only goes so far, especially after a paper from Goldman's Jan Hatzius.

I'm personally split: I'm inclined to think that a dovish stance is the best policy move going forward, if only because NGDP, which I view as the single best indicator, still lags pre-recession levels, which should be reflective of slack in the economy barring the fulfillment of Larry Summer's secular-stagnation narrative. But, with U3 down to 5.9 percent the LFPR still far below pre-recession levels, I'm at a stage where I'm ready to throw in the towel and accept that those people will not re-enter the labor force. If they do, God help us.

Any thoughts?

I don't think economists (or maybe they do and I don't know about it) and laypeople realize that it's really hard for people to switch jobs in a different industry. It's near impossible.

A huge cause of this recent downturn was the implosion of the real estate industry. There are architects, general contractors, mortgage brokers, real estate brokers, etc. were all out of a job. Given the fact that there is a 2 year turnaround time in construction (both a vertical demand and supply curve), real estate is especially susceptible to supply/demand imbalances. When there isn't enough real estate, prices skyrocket. When there is enough, prices plummet.

In this recent downturn, there simply was a huge oversupply of real estate. I've gone to Florida recently and in one town, there was 3,000 units for sale. I couldn't believe it until I saw it. That's 3,000 units in a small town! Some units just sit there for years. It's going to take a long time for demand to increase enough to absorb that. Specifically, the demand driver here would be population growth and people looking for 2nd homes.

In the Philly area where I am based, I personally know a lot of real estate people still jobless or not really in the best job suited for their education/experience. I guess these guys can move industries. Some do. But, it's mentally hard to move industries when you spent the last 20 years doing it. It's understandable that they get stubborn and try to wait it out.

Obama tried to tackle this problem by creating jobs . First, the amount of money he pumped into the economy was a fraction of the amount he really wanted. And, even the amount of money he wanted probably still wouldn't have been sufficient to make a substantial difference.

Second and most importantly, just because there are more jobs making roads and parks, that doesn't mean all those unemployed people in real estate will move into those jobs. Rather, the workers in roads and parks will only get busier and possibly young men will move into the industry. The main problem isn't addressed. The fact that all these older real estate people are still out of a job.

What can we do? I don't think we can do anything. These older guys in real estate will have to wait until population grows enough so housing demand becomes to get in line with supply again. Maybe another 5 years?

Or, perhaps other areas of the economy will grow so that it will make up for this loss. All these guys might be unemployed forever but if other industries grow, it will make up for it. That's why I agree with Obama investing in Solyndra. It was a huge loss but it was worth the risk. (Ignore the favoritism and mismanagement.) 80% of new businesses fail. It's ok because the reward is worth the risk.

As a business owner, I don't look at the economy not only through supply and demand curves. I see the economy as a place in which people work to build and trade things, most of which we really don't need but makes us happy. We invent and build iphones, cars, movies, clothes so that we can trade with each other. This increases the economy. The biggest way we are going to grow the economy is to promote industry creation. I guess tax rate reduction is good but it can have limited impact. Look at apple. They have enough money but don't know what to make. Rather we need to invent more products so we can trade with each other. To invent, we need to focus on education, entrepreneurism (incubator funds), etc.

I think monetary policy is good but it only has limited effect. It's basically the oil in our economic engine. It's the oil that facilitates the trade between goods that we make. Without the oil, engine will definitely break down. But, no matter how much oil we pump into the engine, it won't make the engine produce more after a certain point.

At 10/7/2014 6:54:17 PM, darkkermit wrote:And exogenous aggregate demand shortfalls can be solved through market clearing. However, if markets don't clear then you get a surplus of goods and labor. Labor surplus is the most rigid.

That's impossible at the zero lower bound. The self-correcting mechanism whereby prices and wages fall is destabilizing; nominal rates are pinned at zero, so any fall in the price level translates into a rise in real interest rates, which depresses output and inflation further, increases real rates again, etc. It's never-ending.

Your neoclassical, "let markets clear" nonsense is USUALLY crap because it presupposes the autonomy of the market mechanism -- and this fictitious long run, truly, tells us just to do nothing and wait for market to clear, while eating all the pain in the short run, which we're perpetually stuck in any way -- but it doesn't even work right now by the textbook model.

Yes, you're analysis does seem to be correct, but it isn't never-ending since an equilbrium would have to occur (although sub-optimal).

Which is what I just stated, wage stickiness.

But you don't understand it, at all. You suggested we're moving toward a long-run equilibrium. I said, one, no we're not because wages would be FALLING, not flat, and two, that's impossible at the ZLB, anyway, because output and inflation would be rapidly falling. But they're not.

Wages can be flat w/ an increased LRAS.

You completely misunderstood my point. I'm saying markets "clearing" is a theoretical fantasy that never takes place in the real world, and right now cannot happen at all.

You'll obviously never get 0% unemployment due to incomplete information, irrationality, search-costs, labor regulation and "voluntary unemployment". But the model for labor supply and demand does have its predictive powers.

If your argument is because an increased in aggregate demand causes greater GDP and thus higher wages, this is not necessarily the case. Lower levels of unemployment will increase GDP since more people working = higher GDP. If markets are clearing at lower wages then previously, this is only an indication that aggregate demand was too high previously not that you need to increase aggregate demand.

......so much to unpack here. You really don't understand economics.

Aggregate demand IS GDP. The terms are interchangeable.

Agreed.

Granted, when we say AD we usually mean nominal GDP, and because real variables are hard to quantify, we often associate falling U3 with rising nominal growth because inflation generally moves upward in tandem with real growth.

Inflation to reduce unemployment matters little when inflation has been the norm.

No, that isn't my argument, but good job strawmanning it and demonstrating your lack of understanding. My argument is the basic Philips Curve: the economy improves, necessarily assymetries of bargaining leverage decline as demand for workers rises, there's necessarily more competition for labor amongst firms, wages rise. It's a dubious model at best in light of flat real wages from the 1980s on, but it's generally the textbook case following a deep recession. Pent-up wage deflation is a whole other issue, and I doubt you understand it enough to even make the case for it, but I assure you that it isn't happening; the best explanation is a flattening of the Philip's Curve.

Except the philip curve responds to changes in inflation, not to inflation itself. This was demonstrated to be true in the 70s when high levels of unemployment and inflation was the case. People could rationally predict inflation levels, which made he Philip's Curve invalid. Milton Friedman predicted this with stagflation.

Your argument is straight Hayekian, and it's utter bullcrap. First of all, get off your fixation on market perfection. It's a fantasy.

Microeconomic analysis has value even if its imperfect. Models can't take into account everything otherwise it would be too complicated to be valuable.

You're suggesting that HIGHER AD pre-crisis leads to lower AD post-crisis. That's just a complete fantasy that only works in the Hayekian world where government "distortions" >>> malinvestment >> business cycle. Assymetries of bargaining leverage and lack of labor flows is what you really should be looking at.

Didn't say that, but AD higher than LRAS shouldn't occur.

Significant levels of layoffs IS unemployment. Unemployment only rose 20 basis points in 2007 immediately after the housing bubble burst because there wasn't a SIGNIFICANT amount of layoffs.

Not if the people find jobs elsewhere. Unemployment is defined as 2 weeks of searching without a job. One can envision someone getting a job 1 week after getting laid off.

Of course not, because people aren't rational actors and "real value" -- or MP of labor -- is a theoretical, neoclassical fantasy that doesn't exist in the real world.

Again, models. I mean, to suggest that marginal productivity doesn't exist at all and that wages are just based on randomness or not related at all to marginal productivity but other factors is also dumb.

Thank you for showing you COMPLETELY misunderstood everything I said. Are you actually conceding that LRAS would shift to the left to compensate for an AD shortfall? That the short run can undermine the long run? The second you do that, you concede to Keynes, and this debate is over.

No, I'm saying that the LRAS shifts to the right, because LRAS usually increases, especially when technology and innovation advances.

You just avoided responding to everything I just said, showing you that we're clearly NOWHERE near the NAIRU and therefore nowhere near markets "clearing."

Okay but we're getting closer to market clearing, which was the original point.

I don't know how AS increasing means anything when you just conceded that LRAS shifted to the left as a result of a short-run AD shortfall.:

NEver said that.

Yes, an AD shortfall leads to an excess in supply -- thank you for conceding that --

I've said this for awhile.

and naturally supply will adjust down under a perfect market mechanism. Increasing? That's impossible, unlikely, and untrue. It's also a completely irrelevant point. Are you at the point where you're just throwing crap at the wall and hoping it will stick?

This seems to be a confusion of whether we're discussing LRAS or short-run aggregate supply. I was referring to LRAS, not short-run aggregate supply which obviously shifts downward due to a fall in aggregate demand.

The point I was responding to her regarded monetary policy and the long run, and the point I made was that the Fed cannot impact "long-run" growth because beyond the NAIRU rising AD just leads to higher inflation, but doesn't increase output.

Agreed, and I sad that.

The short run is when prices and wages are sticky. The long run is when prices and wages are perfectly flexible. The reason you can cite some sort of gradient -- which I buy, and which also undermines your dumb, neoclassical textbook argument -- is because the concepts are merely theoretical nonsense. Prices and wages are not flexible, and therefore we aren't in the long run. Your insinuation that prices don't change in the short run is patently absurd, as that suggests a constant level of inflation in the short run. Prices and wages do not adjust DOWNWARD -- which is the case right now.

Except there wouldn't be any inflation at all in the short-run, because prices aren't moving. And yes, the definition of the short-run is sticky prices when prices do not move.